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Precedential Patent Rulings from the Supreme Court and the Federal Circuit 6-14-2016

June 14, 2016

Overview

Halo v. Pulse and Stryker v. Zimmer

Section 284 of the Patent Act provides that, in a case of infringement, courts "may increase the damages up to three times the amount found or assessed." 35 U. S. C. §284. The Federal Circuit has adopted a two-part test for determining whether damages may be increased pursuant to §284. First, a patent owner must "show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent." In re Seagate Technology, LLC, 497 F.3d 1360. Second, the patentee must demonstrate, also by clear and convincing evidence, that the risk of infringement "was either known or so obvious that it should have been known to the accused infringer." Ibid. Under Federal Circuit precedent, an award of enhanced damages is subject to trifurcated appellate review. The first step of Seagate objective recklessness — is reviewed de novo; the second — subjective knowledge — for substantial evidence; and the ultimate decisionwhether to award enhanced damages — for abuse of discretion.

In each of these cases, petitioners were denied enhanced damages under the Seagate framework.

Held: The Seagate test is not consistent with §284.

(a) The pertinent language of §284 contains no explicit limit or condition on when enhanced damages are appropriate, and this Court has emphasized that the "word 'may' clearly connotes discretion." Martin v. Franklin Capital Corp., 546 U. S. 132, 136. At the same time, however, "[d]iscretion is not whim." Id., at 139. Although there is "no precise rule or formula" for awarding damages under §284, a district court's "discretion should be exercised in light of the considerations" underlying the grant of that discretion. Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. , . Here, 180 years of enhanced damage awards under the Patent Act establish that they are not to be meted out in a typical infringement case, but are instead designed as a sanction for egregious infringement behavior.

(b) In many respects, the Seagate test rightly reflects this historic guidance. It is, however, "unduly rigid, and… impermissibly encumbers the statutory grant of discretion to district courts." Octane Fitness, 572 U. S., at .

(1) By requiring an objective recklessness finding in every case, the Seagate test excludes from discretionary punishment many of the most culpable offenders, including the "wanton and malicious pirate" who intentionally infringes a patent — with no doubts about its validity or any notion of a defense — for no purpose other than to steal the patentee's business. Seymour v. McCormick, 16 How. 480, 488. Under Seagate, a district court may not even consider enhanced damages for such a pirate, unless the court first determines that his infringement was "objectively" reckless. In the context of such deliberate wrongdoing, however, it is not clear why an independent showing of objective recklessness should be a prerequisite to enhanced damages. Octane Fitness arose in a different context but is instructive here. There, a two-part test for determining when a case was "exceptional" — and therefore eligible for an award of attorney's fees — was rejected because a claim of "subjective bad faith" alone could "warrant a fee award." So too here: A patent infringer's subjective willfulness, whether intentional or knowing, may warrant enhanced damages, without regard to whether his infringement was objectively reckless. The Seagate test further errs by making dispositive the ability of the infringer to muster a reasonable defense at trial, even if he did not act on the basis of that defense or was even aware of it. Culpability, however, is generally measured against the actor's knowledge at the time of the challenged conduct. In sum, §284 allows district courts to punish the full range of culpable behavior. In so doing, they should take into account the particular circumstances of each case and reserve punishment for egregious cases typified by willful misconduct.

(2) Seagate's requirement that recklessness be proved by clear and convincing evidence is also inconsistent with §284. Once again, Octane Fitness is instructive. There, a clear and convincing standard for awards of attorney's fees was rejected because the statute at issue supplied no basis for imposing a heightened standard. Here, too, §284 "imposes no specific evidentiary burden, much less such a high one," 572 U. S., at . And the fact that Congress erected a higher standard of proof elsewhere in the Patent Act, but not in §284, is telling. "[P]atent-infringement litigation has always been governed by a preponderance of the evidence standard." Id., at . Enhanced damages are no exception.

(3) Having eschewed any rigid formula for awarding enhanced damages under §284, this Court likewise rejects the Federal Circuit's tripartite appellate review framework. In Highmark Inc. v. Allcare Health Management System, Inc., 572 U. S. the Court built on the Octane Fitness holding — which confirmed district court discretion to award attorney's fees — and rejected a similar multipart standard of review in favor of abuse of discretion review. The same conclusion follows naturally from the holding here: Because §284 "commits the determination" whether enhanced damages are appropriate to the district court's discretion, "that decision is to be reviewed on appeal for abuse of discretion." Id., at . Nearly two centuries of enhanced damage awards have given substance to the notion that district courts' discretion is limited, and the Federal Circuit should review their exercise of that discretion in light of longstanding considerations that have guided both Congress and the courts.

(c) Respondents' additional arguments are unpersuasive. They claim that Congress ratified the Seagate test when it reenacted §284 in 2011 without pertinent change, but the reenacted language unambiguously confirmed discretion in the district courts. Neither isolated snippets of legislative history nor a reference to willfulness in another recently enacted section reflects an endorsement of Seagate's test. Respondents are also concerned that allowing district courts unlimited discretion to award enhanced damages could upset the balance between the protection of patent rights and the interest in technological innovation. That concern — while serious — cannot justify imposing an artificial construct such as the Seagate test on the limited discretion conferred under §284.

Indacon filed suit against Facebook, alleging that the software architecture for Facebook's social network infringes its patent. On appeal, Indacon disputes the construction of four claim terms: "alias," "custom link," "custom linking relationship," and "link term." The panel affirms the constructions of the district court.

The district court construed the claim term "alias" as a "textual expression that the user can define to serve as an alternative name or label." Indacon argued that this term encompasses a "textual or graphical hyperlink,” and not just "textual expression.” In reaching its construction, the district court first construed "term" as "textual expression, such as words," finding an express definition of "term" in the specification as "words, numbers, spaces, etc." Then, finding that the specification described an alias as a term, the court looked to this construction of "term" to determine that "alias" is similarly limited to textual expression. The panel agrees with the district court that the use of "etc." in this definition implies additional, but similar forms of expression and does not reasonably encompass graphical expression. Neither the specification nor the prosecution history supports a broader construction.

The panel also agrees with Facebook that the link claim terms have no plain or established meaning to one of ordinary skill, and thus cannot be construed broader than the disclosure in the specification. The specification supports the district court's construction that the link terms are capable of being identified as a link. Indacon argues that claim differentiation precludes the district court's construction because certain claims recite linking instances while other claims recite linking all instances of the link terms. However, the panel rules that where the compared claims (here, independent claims) are not otherwise identical in scope, claim differentiation does not apply.

Indacon’s ’276 patent is directed to a system for searching, indexing, perusing, and manipulating files in a database, particularly through the insertion of automatically generated hyperlinks. Claim 1 recites:

1. A data acquisition and perusal system, comprising:

a database selection module that enables selection of a plurality of files for inclusion into at least one selectable database;

a link module that enables custom links to be defined between selected terms of selected files of the at least one database;

wherein the link module enables association of any link term with any of the plurality of files in the at least one selectable database; and

wherein the link module enables at least one alias term to be defined for the any link term to enable a link to be established between the at least one alias term and the any of the plurality of files;

a database index generator module that enables generation of a searchable index of the data contained in the at least one selectable database, including the custom links, the generator module enabling only valid custom links to be added to the searchable index; and

a search module that enables a search of the searchable index to be performed according to a search criterions.

Indacon filed suit against Facebook, alleging that the software architecture for Facebook's social network infringes the patent. On appeal, Indacon disputes the construction of four claim terms: "alias," "custom link," "custom linking relationship," and "link term." The district court considered only intrinsic evidence in construing the disputed claim terms, so our review is de novo.

The Construction of “Alias” Is Affirmed

The district court construed the claim term "alias" as a "textual expression that the user can define to serve as an alternative name or label." Indacon acknowledges that "alias" and "alias term" are used interchangeably in the patent but argues that the term encompasses a "textual or graphical hyperlink," and not just "textual expression." Indacon raises two issues: (1) whether "alias" encompasses graphical expression as well as textual expression, and (2) whether an "alias" is a hyperlink.

The district court first construed "term" as "textual expression, such as words," finding an express definition of "term" in the specification as "words, numbers, spaces, etc." Then, finding that the specification described an alias as a term, the court looked to this construction of "term" to determine that "alias" is similarly limited to textual expression.

Indacon argues that the court erred by basing its construction of "alias" on its construction of "term." The patent defines "term" by referring to forms of textual expression ("words, numbers, spaces, etc."). The use of "etc." in this definition implies additional, but similar forms of expression and does not reasonably encompass graphical expression. Indacon also recognizes that exemplary claim 1 is not directed to just an "alias," but actually requires an "alias term." Thus, Indacon's argument that the construction of "term" is irrelevant to the construction of "alias" is unconvincing.

Nothing in the specification suggests that "alias" encompasses graphical expression. The specification consistently describes an alias as a term, which, as explained above, is limited to textual expression. The "Summary of the Invention" explains: "The link module may further enable at least one alias term to be defined for any selected link term to enable a link to be established between each alias term and any of the files in the database." Similarly, all examples of an "alias" in the specification consist of textual expression. The prosecution history also fails to support an interpretation of an "alias" encompassing graphical expression.

Indacon uses the specification's reference to file formats that may contain graphical elements as support for its view that an "alias" can be graphical. But nothing in the specification ties these file types, or their potentially graphical elements, to an "alias." To the contrary, with respect to RTF files, the specification teaches "discarding all image byte sequences without affecting the absolute position determination of visible characters in words."

We also agree with the district court that an "alias" is not a hyperlink, contrary to Indacon's assertions. The specification explains that "the link module may further enable at least one alias term to be defined for any selected link term to enable a link to be established between each alias term and any of the files in the database." As such, a link can be established to connect an "alias" or other link term to files in the database, but the alias is not itself the link. Thus, we adopt the district court's construction of "alias" as a "textual expression that the user can define to serve as an alternative name or label."

The Construction of “Custom Link,” “Custom Linking Relationship,” and “Link Term” Is Affirmed

The district court construed "custom link" as "a link the user can define using a chosen term that allows each instance of the term in the plurality of files to be identified and displayed as a link to a file chosen by the user, without modifying the original database files"; "custom linking relationship" as "a linking relationship the user can define using a chosen term that allows each instance of the term in the plurality of files to be identified and displayed as a link to a file chosen by the user, without modifying the original database files"; and "link term" as “a term chosen by a user that can be displayed as a link to a file specified by the user whenever the user encounters the term in the plurality of files." Indacon objects to the construction of the link claim terms to the extent they exclude creation of a link for less than all instances of a defined term, disputing the construction that allows each instance of the defined term to be identified and displayed as a link. We disagree and adopt the district court's constructions of the link claim terms as being limited to allowing each instance of a link term to be identified and displayed as a link.

We agree with Facebook that the link claim terms have no plain or established meaning to one of ordinary skill. As such, they ordinarily cannot be construed broader than the disclosure in the specification. Irdeto Access, Inc. v. Echostar Satellite Corp., 383 F.3d 1295 (Fed. Cir. 2004). The specification explains that "the link module enables association of any selected link term with any of the plurality of files in the selectable database." The specification demonstrates that all link terms are capable of being identified as a link. ("When a link term is encountered in a file or document, the link term is indicated or otherwise highlighted so that the user can select the indicated link term to jump to the linked file.") ("A user can instruct the database index generator to insert custom links by entering a custom link word in a New Custom Link Word edit box and then entering a path and name of a file or document to whichall such words should link in the File to Link To edit box.") Thus, we agree that the link claim terms are properly construed as allowing each instance of a defined term to be identified and displayed as a link.

Finally, Indacon argues that claim differentiation precludes the district court's constructions of the link claim terms because certain claims recite linking instances while other claims recite linking all instances of the link terms. Indacon points, on the one hand, to claims 2 and 9, which recite "wherein the link module is operable to link instances of the one or more text strings in the selected files" and "wherein the step of defining the linking relationships includes linking instances of the one or more text strings in the selected files.” In contrast, Indacon points to claims 14 and 15, which both recite "automatically generating links between all instances of the link term within the plurality of selected source files and the designated file." Importantly, however, all of claims 2, 9, 14, and 15 are independent claims, and we have declined to apply the doctrine of claim differentiation where, as here, the claims are not otherwise identical in scope. Further, “although claim differentiation is a useful analytic tool, it cannot enlarge the meaning of a claim beyond that which is supported by the patent documents…."

SAS filed an IPR to review the patentability of a ComplementSoft patent directed to an integrated development environment for generating and maintaining source code, programmed in data manipulation languages. The Board determined that all of the instituted claims, except for claim 4, were unpatentable in view of the prior art. The panel affirms the construction of claim 1 challenged on appeal by ComplementSoft. However, the panel vacates the Board's determination that claim 4 is patentable and remands so that the parties may address a new construction that the Board adopted in its final written decision after interpreting the claim differently before.

Specifically, the Board's final written decision concluded that dependent claim 4 was patentable because the prior art did not satisfy the "graphical representations of data flows" limitation in claim 4, which it construed in its final written decision in a manner that was different than it provided in its institution decision. The Board then denied SAS's request for rehearing in view of the new claim construction.

The panel notes that § 554(b)(3) of the APA provides that persons entitled to notice of an agency hearing shall be timely informed of the matters asserted. SAS, as the petitioner, was deprived this opportunity when the Board revised its claim construction and then denied SAS's request for rehearing. Accordingly, the panel vacates the Board's determination that claim 4 is patentable and remands so that the parties may address the new construction that the Board adopted in its final written decision.

Judge Newman concurs as to all aspects of the opinion but dissents from the majority's rejection of the argument by SAS that the Board should have addressed all of the claims challenged in its IPR petition. She contends, as she has in other cases, that the Board's practice of deciding the validity of only some of the patent claims challenged in an IPR petition does not conform to the America Invents Act.

The '936 patent is directed to an integrated development environment for generating and maintaining source code, programmed in data manipulation languages. SAS challenged all sixteen of the patent’s claims in its petition for IPR. The Board instituted as to claims 1 and 3-10 on obviousness grounds, but did not institute for claims 2 and 11-16. The Board's final written decision concluded that claims 1, 3, and 5-10 were unpatentable as obvious. The Board also found claim 4 patentable over the prior art. Particularly, the Board found that the prior art did not satisfy the "graphical representations of data flows" limitation in claim 4, which it newly construed to mean "a graphical representation comprised of icons depicting data processing steps and arrows to depict the movement of data through source code." The construction of this purportedly unmet claim limitation differed from the interpretation the Board gave in its institution decision: "a depiction of a map of the path of data through the executing source code." The final written decision did not review patentability of other claims for which the Board did not institute IPR.

SAS argues that the Board erred by construing "graphical representations of data flows" in claim 4 as "a graphical representation comprised of icons depicting data processing steps and arrows to depict the movement of data through source code." SAS also argues that it was improper for the Board to change its interpretation of this claim term in the final written decision without affording the parties an opportunity to respond. SAS lastly argues that the Board's final written decision is deficient for failing to address the patentability of all claims included in the petition, including those for which the Board did not institute IPR.

The Construction of “Graphical Representation of a Data Flow” Is Affirmed

We agree with the Board's construction. The broadest reasonable interpretation here is that the claimed "graphical representation of a data flow" is commensurate with the "data flow diagram" described in the specification. The Board concluded that the specification suggests that the terms "data flow diagram" and "graphical representation of data flow" are interchangeable. The only difference between these two phrases is the word "diagram" in the first phrase and the word "graphical representation" in the other. And a diagram is, in fact, a graphical representation. Because the specification defines data flow diagram, one in the art having read the specification would apply this definition to graphical representations of data flows as well. What the specification also makes clear is that program flows differ from data flows. The Board correctly noted that the specification distinguishes these flows. The specification crystallizes this distinction when it describes a user having to "toggle between the program flow and the data flow display" in the visualizer. The figures also show that program flows differ from data flows.

The structure of the claims also lends support to the Board's construction. Independent claim 1 recites broadly "graphical representations of flows," and dependent claims 2 and 3 recite more specifically that the flows are "data flows" or "program flows," respectively. This structure is consistent with the specification, which first discloses visualizations generally and then immediately defines program flow diagrams and data flow diagrams as distinct things.

ComplementSoft’s Challenges to Claim Construction Are Rejected

On cross-appeal, ComplementSoft challenges the construction of "data manipulation language" as "a programming language used to access data in a database, such as to retrieve, insert, delete, or modify data in the database." We disagree. There is nothing in the prosecution history to suggest that SQL, which the '936 patent specification specifically identifies as a data manipulation language, embedded within another programming language does not satisfy the "data manipulation language" limitation.

ComplementSoft lastly argues that "access" to data in a database is not enough to make a programming language a "data manipulation language." But ComplementSoft's own expert and a named inventor on the '936 patent contradicted this provided testimony. Thus, we agree with the Board on this point.

ComplementSoft's second construction challenge argues that when the Board construed "graphical representations of flows within the retrieved source code" to mean "a diagram that depicts a map of the progression (or path) through the source code," it failed to limit the graphical representations to only depicting segments of source code that manipulate data. Because we have already determined that a "data manipulation language" is not limited to languages that only perform data manipulation, we likewise do not inject a similar limitation into claim 1.

By Adopting a Different Construction in Its Final Written Decision, the Board Deprived SAS of Its Rights Under the Administrative Procedure Act

As noted above, we agree with the Board's ultimate construction of the "graphical representations of data flows" claim term. The Board's procedure for arriving at this construction, however, gives us pause. In its institution decision, the Board's claim construction section indicated that "data flow diagram" means "a map of the path of data through the executing source code." The Board equated this interpretation of "data flow diagram" with the claim limitation "graphical representations of data flows" when it denied institution of a prior art ground. Particularly, the Board concluded that SAS had not demonstrated that the prior art ground disclosed "a depiction of a map of the path of data through the executing source code" and thus had not shown that the ground "discloses a graphical representation of a data flow."

ComplementSoft filed its patent owner's response and identified "a diagram that depicts a map of the path of data through the executing source code" as the Board's construction for the term "graphical representations of data flows." While it argued that the Board misconstrued the "data manipulation language" term, it did not similarly argue that the Board misconstrued graphical representations of data flows. SAS's reply took issue with the construction's inclusion of the term "executing," but suggested no modifications other than to remove this term from the construction. The parties did not ask for a revised construction of "graphical representations of data flows" at the oral hearing.

The Board's final written decision acknowledged that "the parties directly disagree regarding only the construction of the term 'data manipulation language.'" Nonetheless, the Board newly construed "graphical representations of data flows" as "a graphical representation comprised of icons depicting data processing steps and arrows to depict the movement of data through source code," which varies significantly from its initial interpretation of the term as "a map of the path of data through the executing source code." In denying SAS's request for rehearing, the Board concluded that the new construction did not prejudice SAS because SAS could have made construction arguments for the term in its IPR petition.

We disagree with the Board's approach. IPR proceedings are formal administrative adjudications subject to the procedural requirements of the Administrative Procedure Act. One such APA provision is that "persons entitled to notice of an agency hearing shall be timely informed of . . . the matters of fact and law asserted." 5 U.S.C. § 554(b)(3). SAS, as the petitioner, is entitled to this procedural protection in this instance. Although in the past we have discussed § 554(b)(3) with respect to the protection it provides to the patent owner, the provision is not so limited in an instituted IPR proceeding. First, the APA provides that this protection applies to "persons entitled to notice of an agency hearing." 5 U.S.C. § 554(b)(3). In an IPR proceeding, this class of persons includes the petitioner. Moreover, affording petitioners with the benefit of § 554(b)(3) is appropriate because petitioners are not disinterested parties in an IPR proceeding. Rather, petitioners stand to lose significant rights in an instituted IPR proceeding because of the estoppel effects that trigger against them if the Board issues a final written decision.

We have interpreted § 554(b)(3) in the context of IPR proceedings to mean that "'an agency may not change theories in midstream without giving respondents reasonable notice of the change' and 'the opportunity to present argument under the new theory.'" That maxim applies in this fact-specific circumstance. What concerns us is not that the Board adopted a construction in its final written decision, as the Board is free to do, but that the Board "changed theories in midstream." SAS focused its argument on the Board's institution decision claim interpretation, a reasonable approach considering ComplementSoft agreed with this interpretation in its patent owner's response and never suggested that the Board adopt the construction that eventually materialized in the final written decision. It is difficult to imagine either party anticipating that already-interpreted terms were actually moving targets, and it is thus unreasonable to expect that they would have briefed or argued, in the alternative, hypothetical constructions not asserted by their opponent. This is especially true for SAS, considering the strict fifteen page limit for its reply to the patent owner's response.

Under Synopsys, the Board Need Not Address All Challenged Claims in Its Final Written Decision

SAS also argues that the Board erred by not addressing in the final written decision every '936 patent claim SAS challenged in its IPR petition. SAS's argument, however, is foreclosed by our recent decision in Synopsys, Inc. v. Mentor Graphics Corp., 814 F.3d 1309 (Fed. Cir. 2016). Accordingly, we reject SAS's argument that the Board must address all claims challenged in an IPR petition in its final written decision.

Judge Newman’s Dissent

I agree that principles of due process, as well as the strictures of the APA, require that the parties have the opportunity to adjust their arguments and evidence to the PTAB's change in claim construction. I write separately because the PTAB's practice of deciding the validity of only some of the patent claims challenged in the petition does not conform to the AIA. The facts and rulings in the present case further illuminate the error in the PTO's adoption of rules that depart from the legislative plan. The exclusion of some of the challenged claims from the statutory procedures and estoppels of the AIA, accomplished by accepting some of the claims for which review is sought while ignoring others, in the PTO's absolute discretion, serves no purpose other than to negate the intended legislative purpose of the AIA.